Q U A R T E R LY
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SPRING 2019 VOLUME 13 ISSUE 1
Will QOFs Cannibalize the 1031 Industry?
QOFs and 1031s This Year, Next Year and Beyond I 2018 Non-Traded Retail Energy Report I Around the Industry Update Q&A I ADISA News
Q U A R T E R LY
SPRING 2019 VOLUME 13 ISSUE 1
1 — Executive Director’s Letter
ALTERNATIVE INVESTMENTS QUARTERLY
A Banner Year!
Peter Magnuson I Ladenburg Thalmann
4 — Will Qualified Opportunity
Funds Cannibalize the
1031 Industry?
CONTACT INFORMATION ADISA I 10401 N Meridian St., Suite 202 I Indianapolis, IN 46290 Direct: 317.663.4180 I Toll Free: 866.353.8422
The year 2018 was a banner year for ADISA! In membership, in advocacy, and of 12 — 2018 Non-Traded Retail
course in events, we set records and boasted records. Our hard work, our Board of
Directors, and, yes, our democratic business model and more proved up to the task
Energy Report
Fax: 317.815.0871 I E-mail: adisa@adisa.org John Harrison I Executive Director I 317.663.4172 Tanisha Bibbs I Director of Event Planning I 317.663.4174
of fueling this impressive growth. 22 — Around the Industry
Update Q&A
Jennifer Fitzgerald I Director of Marketing I 317.663.4175 Tony Grego I Associate Executive Director I 317.663.4173
A Banner Year! By John Harrison, Executive Director, ADISA
ADISA EDITORIAL BOARD Chair I Brandon Raatikka I FactRight, LLC
Executive Director’s Letter
First, in membership, we completely a months-long clean up and purge of our database—cleaning up inactive complimentary memberships—and still grew over 3% from 2017. And what’s even better is that
26 — ADISA News & Events
our Associate Members (BD, RIA, Family Offices, Reps and advisors) grew to be almost 70% of our
Erin Balcerzak I Member Services Coordinator I 317.663.4183
4500 members. Our number of company members grew from 600 to 700, and our Sponsor and Affiliate
Design I DesignMark I Susie Cooper
membership expanded into new categories: crowdfunding, Opportunity Zones, data analytics, office
adisa.org
and custodial support and more. Secondly, our advocacy efforts were second to none in protecting and fostering success for
Copyright © 2019
our industry: coalition-based activities on 1031, state work (NJ) on the Fiduciary Rule, work with
By ADISA (Alternative & Direct Investment Securities Association),
the Treasury Department and the IRS, letters to California state (on Bill 2529), the SEC on RBI and
formerly REISA, formerly the Tenant-In-Common Association. All rights reserved. Readers may copy sections of this publication for personal use. However, it is a violation of U.S. copyright laws to copy substantial portions of the publication for any reason without permission. The Copyright Act of 1976 provides for damages for illegal copying. If you wish to copy and distribute sections of this publication, contact Jennifer Fitzgerald at jfitzgerald@adisa.org.
accredited investor definition, and FINRA on 18-08 plus interviews printed in the Wall Street Journal in defense of private equity. Thanks to all on our L & R Committee who helped move these efforts forward in designing and reviewing our communications (Catherine Bowman—chair, John Grady, Deb Froling, Larry Sullivan, and our own “man-in-DC”, Tom Rosenfield). Most amazing is the efficiency and economy with which we accomplished these tasks: the ROI on our efforts is something to be proud of, and all who have viewed our expense numbers agree we get incredible bang for our buck. And now we come to events, our specialty. 2018 set a new standard for us. We saw a strong Spring Conference in Orlando with the strongest quality marks yet. The summer event in New York set an attendance record—not bad for our first foray there. And what can I say about the Annual Conference in
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What I’m most proud of though
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is the strength of our Board of Directors. First, it’s very difficult to get on ADISA’s Board; it is not a do-nothing resume builder, but instead a dynamic group who truly roll up their sleeves to tackle industry problems and grow the organization.
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Vegas—a crowd of over a thousand (1,011 to be exact) with about half of them BD/RIA/FO/Reps/Advisors. That’s an impressive crowd to see close to 80 exhibits, 30+ breakout sessions, and some unforgettable general sessions. This, we can all be very proud of. What I’m most proud of though is the strength of our Board of Directors. First, it’s very difficult to get on ADISA’s Board; it is not a do-nothing resume builder, but instead a dynamic group who truly roll up their sleeves to tackle industry problems and grow the organization. It’s no wonder they’re smart and committed—risking one’s self in an election, agreeing to serve the group’s interest beyond one’s own, and commitment of time—means only those with wisdom and dynamism become our leaders. I began with a quick review of our successes including an “and more”. One of the “and more” projects is this very magazine, AIQ, meant to inform the industry, and another is our research and academic outreach efforts. If the business schools learn about our segment of the industry, then more sales will result in the future. I am fortunate to have ADISA sponsor me in some direct research, and research skills have
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When his Major League dreams did not pan out, Rick Buoncore of MAI Capital Management went on a hitting streak in the financial services field
Private debt funds
It has been a heady decade for non-bank lenders, and the opportunities have attracted a crowd
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The market remains strong and real estate is among the assets that performed well globally
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Sponsorship: Our Sponsorship packages are a consultative engagement that include a robust offering of digital and print advertising as well as a seat at our exclusive, invitation-only annual editorial advisory board meeting.
already been put to work to support our L & R efforts and literature to support our advocacy efforts during 2018. Speaking of recent literature, we are adapting our Like-kind Exchange brochure originally designed for educating Capitol Hill for general use by the advisor population. ADISA’s banner 2018 year involved the leadership of many. Hats off to our 2018 president, Keith Lampi, and his Board who oversaw this progress with energy, steadfastness, and collegiality. And thanks to all of ADISA’s membership for your interest, your hard work, and of course, your attendance. What a great year for our organization!
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To learn more about these products and how Real Assets Adviser can work with you, contact:
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Will Qualified Opportunity Funds Cannibalize the 1031 Industry? By Evan Hudson, Mayer Greenberg and Brian Senie; Stroock & Stroock & Lavan LLP
QOFs and 1031s this year, next year and beyond. Qualified Opportunity Funds (“QOFs”) are a hot topic right now. In December 2017, Congress introduced Qualified Opportunity Zones (“QOZs”) into the Internal Revenue Code, and the Treasury Department released proposed regulations in October 2018.
Many of the QOZ benefits are time-sensitive, so investors are already thinking about how to take advantage of the QOZ rules, and many sponsors have begun forming QOFs. The general idea is fairly straightforward: if, within 180 days of a sale, an investor reinvests the sale proceeds into a QOF entity that acquires qualifying property within a QOZ (a designated census tract, as further described below), then the investor’s immediate taxable gain is deferred and major tax benefits start kicking in after five, seven and ten years.1
The main benefits of QOFs are trifold: • deferral (potentially until 2026) of tax on capital gain that is reinvested into a QOF; • reduction in the amount of gain ultimately subject to tax after holding the QOF interest for five years or, even better, seven years; and • for an investor holding a QOF interest for ten years or more, the elimination of tax on any appreciation in the interest’s value after its acquisition.
No doubt, there are some great tax savings to be had, especially if the underlying investment significantly appreciates in value. But, as readers of AIQ are well aware, QOFs are not the only tax-advantaged strategy on the street. Sponsors have been syndicating Delaware statutory trusts (“DSTs”) for years. Ever since the
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IRS issued Revenue Ruling 2004-86 almost 15 years ago, DSTs have been treated as valid for purposes of so-called “1031 exchanges” (or “1031s”) under Section 1031 of the Internal Revenue Code, and have served as the vehicle of choice for investors desiring to relinquish legacy real estate investments (often directly held, labor-intensive and sub-institutional-grade) in exchange for other real estate assets, typically professionally managed, completely passive and institutional-grade, without recognizing gain.2 According to Mountain Dell Consulting, the DST industry is on track to raise over $2 billion from retail investors in 2018, the magnitude of the market almost reaching its pre-crisis levels.3 Both QOFs and DSTs offer investors potential deferral of taxation on capital gains. Both promise access to economically attractive assets selected and managed by expert sponsors. Sponsors, financial advisors and investors are asking whether the retail market is big enough to support
Both QOFs and DSTs offer investors potential deferral of taxation on capital gains. Both promise access to economically attractive assets selected and managed by expert sponsors.
both syndication strategies. Or, we are often asked, are QOFs primed to cannibalize the 1031 industry? Having studied the issues, we believe that the market will support both products. Going out on a limb, we predict that while QOFs are likely to take some market share, the products are different enough that QOFs will not replace 1031s in coming years. The reason is that QOFs and 1031s each come with certain advantages and disadvantages, which we set forth below. Accordingly, a financial advisor, after making a suitability determination for a given client, will likely decide to allocate that client’s assets to one type of product over the other, or some maybe to both, based on the client’s circumstances, needs and goals. To show how this might work in practice, below we present nine hypothetical scenarios that a client might bring to a financial advisor, and how that financial advisor might begin to think about the differences between QOFs and 1031s. Of course, no single circumstance should be considered in isolation from all the circumstances facing a client. Also, we are not giving legal advice, so again we stress that each client scenario, and each “advantage” determination, is hypothetical. But we think the format presented below is useful. Additionally, we hope to give sponsors some insight as to how their syndicate members may be approaching the issues, and accordingly, which way the market may be headed.
1.
The client didn’t dispose of a real estate asset, but stock, or maybe a different kind of asset.
Advantage: QOF (not even a close call) This one is easy, and the answer is clear. An investor may roll any capital gain into a QOF.4 In fact, it was tech entrepreneurs—a group often looking to exit stock-investments in a tax-advantageous way—who pushed for the QOZ legislation to begin with. Proceeds from the sale of stock are not eligible for 1031 rollover—the gain must be from the sale or exchange of real property. So, when a client disposes of shares of her private software company (or roofing business, or waste management enterprise … )—or perhaps a publicly traded stock, bond or mutual fund—absent unusual circumstances, a 1031 should not even be on the table.
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2.
replacement property would need to have similar debt and basis to avoid boot, and would accordingly itself have
The client prefers to invest in a proven real estate market.
debt in excess of basis). A QOZ investment, however, may only be made to the extent of the cash available and accordingly might not be able to cover the entire amount of the gain recognized—although an investor could
Advantage: 1031 If an investor wants to invest in a proven real estate market, a 1031 may be the way to go. In a 1031 deal, the replacement property may be located anywhere in the U.S., and there are no restrictions on what kind of neighborhood the property sits in. Although the replacement property must be “like-kind” to the relinquished property, typically most real property can potentially qualify. Perhaps even more importantly, replacement
invest the remaining cash from his own funds in order to receive QOZ benefits on the full gain amount.
4.
The client insists on permanent tax deferral.
property in a 1031 exchange may be “mature” property that is already in service, whereas this is more difficult
Advantage: 1031
in the QOZ context as discussed below.
A 1031 exchange replaces one property with another of like kind, such that the new property is essentially
QOF benefits are available only for properties within the designated QOZs—certain low-income communities
treated as a continuation of the old—with the same tax basis, depreciation period and other tax attributes.
(defined as census tracts with poverty rates of at least 20% and meeting certain requirements regarding median
A consequence of this is that once the exchange is completed, the investor may continue to hold the new
family income) that are designated by each state, on a state-by-state basis. Although QOZs exist in all 50 states,
property indefinitely without any pending taxable event.
and many will probably prove to be high-growth markets in future years, a QOZ is almost by definition not a proven real estate market. Additionally, qualifying QOZ property must generally either be newly placed in service by the QOF or substantially improved by the QOF—accordingly, it is difficult for a QOF to acquire pre-existing “proven” assets.
The QOF rules, however, do not provide permanent deferral of taxable gain. This is why the advantage, for pure tax deferral, goes to the 1031 product. An important caveat is that QOFs do offer the potential for permanent reduction of the gain subject to tax. Specifically, the QOZ rules reduce the amount of gain ultimately subject to tax by 10% after a five-year hold
3.
and an additional 5% after a seven-year hold. (Thus, after a seven-year hold, tax is owed on only 85% of
The client wants to take some money off the table upfront tax-free.
Advantage: QOF, if there is cash in excess of the amount of gain
the initial rollover gain.) But this gain is nevertheless included in income no later than December 31, 2026, and accordingly, investors should expect to pay tax at that time. However, an investor wishing to liquidate the investment regardless may enjoy a reduction in tax owed that would be unavailable in the 1031 context. Additionally, the QOZ rules provide a special additional benefit whereby an investor holding ten years or more
In a 1031 deal, if, as part of the exchange, the investor extracts cash proceeds from the sale of the
recognizes no additional gain on subsequent sale. Thus investors planning on a long-term hold but eventual sale
relinquished property (and does not use such cash to acquire replacement property in the exchange), the
may derive significant benefits from the QOZ rules above and beyond the deferral of the initial taxable gain.
investor must pay tax on that amount (known in tax parlance as the “boot”). This is because of the “over or up” rule providing that, for a 1031 exchange to be completely tax-free, the replacement property must be of equal or greater value than the property relinquished. Although cash may be extracted later on by means of a refinancing, as is common in the real estate world, this nevertheless may add complications—potentially including both tax risk and economic risk. Under the QOZ regime, on the other hand, the investor need not roll over 100% of the proceeds from
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The client prefers proven investment strategies over novel ones.
Advantage: 1031
the sale of the property, but only the portion that represents taxable gain. In other words, the portion
1031 exchanges have been a staple of the market for a long time, whereas QOF investments are novel.
representing the basis in the property may be withdrawn tax-free—a nice way to experience a mini-liquidity
Accordingly, the latter come with significant uncertainty even following the issuance of the proposed
event before rolling over the gain. Granted, some assets will have been depreciated to zero already, but if
regulations. In particular, whereas 1031 exchanges are fundamentally real property transactions, the QOZ
there is basis to be had, the QOF regime allows the investor to extract it.
regime involves investment into QOFs, entities subject to requirements that may affect or restrict the structure
Conversely, however, if the property being sold by an investor is subject to debt in excess of its tax basis—i.e.,
and operation of any acquired properties. Practitioners are still awaiting guidance clarifying the nuances of
if there is taxable gain in excess of the cash received by the investor—then a 1031 may have the advantage. A
these tax rules, and the ultimate guidance on these points may have either a positive or negative influence
1031 exchange would permit tax-free reinvestment into a replacement property in this scenario (although the
on the desirability of QOZ structures as an alternative to 1031s.5
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6.
The client’s rollover funds are coming from a partnership.
We believe that
Advantage: QOF In a 1031 exchange, the same taxpayer that disposed of the relinquished property must be the
interest in QOFs may slightly cool
one that acquires the replacement property—a technicality that has bedeviled a generation of tax
the market for 1031s, which has been
planners and frustrated the many investors who invested in real estate through a partnership or other pass-through entity only to have some (but not all) of the partners wish to proceed with a
burning quite hot for several years now.
1031 exchange. In the QOZ context, though, a partnership or other pass-through entity may pass recognized gains through to its partners, who may then reinvest those gains as if they had recognized them directly. Additionally, while both 1031s and QOZs require investors to reinvest their proceeds within 180 days, the QOZ regime provides some additional leeway for investors reinvesting gains recognized through a partnership: such investors may have their 180-day period begin at the end of the partnership’s taxable year, rather than on the date of the sale. Thus not only is selling through a partnership not a barrier in the QOF context, it may actually provide investors additional time to find suitable replacement investments. As a result, investors whose real property interests are indirectly held may have a significantly easier time getting tax deferral benefits through a QOF.
6
8.
The client wants to reinvest in an operating business, not real estate.
1—Stroock Alert. Stroock’s Take on the New ‘Qualified Opportunity Zone’ Guidance. October 19, 2018.
Advantage: QOF
7.
In a 1031 exchange, not only must the proceeds come from real estate, but the acquired asset must be real
The client does not want to be locked into a single investment for a long time.
Advantage: 1031 QOZ benefits (other than the deferral of taxable gain, which would otherwise be recognized immediately) begin after a five-year hold, with additional benefits after seven years and ten years. Accordingly, a QOZ investor should plan on holding its QOF interest for a significant period of time, or else forfeit the QOZ benefits. The market is still brand-new, but we anticipate that many, if not most, QOFs will set a targeted duration of ten-plus years so as to maximize the potential tax benefits.
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1031 market has shifted towards the DST structure over the past decade, in this
estate as well (although, as noted above, DST interests qualify for this purpose).
article we use the term “DST”
The property acquired by a QOF must be tangible property used in a trade or business. Although this naturally lends itself to real property and the rental thereof, operating businesses—including renewable
as a proxy for the entire 1031 market. 3—Mountain Dell Consulting. Market Report – Securitized
energy and manufacturing—have also been receiving serious consideration in the market.
1031 Industry – Q2 2018 (as of June 29, 2018).
9.
4—This includes both short-term capital gain and long-term
The client demands the “best” product for his particular tax needs.
capital gain, but “dealer income” and certain types of depreciation “recapture” may not qualify.
Advantage: ???
5—Stroock Alert. Six Burning
to hold the replacement property for at least a year or two before disposing of it, to satisfy the “held
Obviously, this is a trick scenario. If anything, it shows the careful thought that financial advisors must put
Opportunity Zone Guidance.
for investment” requirement, the investor is not otherwise restricted from accepting a good offer on
into their recommendations. It also demonstrates the basis of our prediction that, without a clear “best”
the property. Granted, when investors invest through a DST, it is the sponsor, not the investor, who
product for every single situation, QOFs will not cannibalize the 1031 industry. The differing tax attributes
identification of the replacement
decides when the DST will liquidate. But investors should benefit from the sponsor’s flexibility to sell the
of the two products leave significant room for both of them to sit on the shelves of broker-dealers and
strict escrowing and tracking
underlying asset when the time is right (even if ten years have not passed) without worrying about lost
RIAs. We believe that interest in QOFs—and the unique potential tax benefits they offer—may slightly
not — so there are additional
tax benefits—although the investors may need to engage in another 1031 at the time of the DST sale
cool the market for 1031s, which has been burning quite hot for several years now. But how much so
to avoid recognizing taxable gain.
is anyone’s guess, and we don’t purport to be smart enough to give a definitive answer to that here.
1031 exchanges, though, are fairly flexible as to their frequency. Although an investor will often want
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2—Because virtually the entire
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Questions on the New Qualified November 6, 2018. 6—In addition, 1031s require property within 45 days, and of sale proceeds. QOFs do procedural ways in which QOFs may be “easier” on investors.
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2018 Non-Traded Retail Energy Report By Brad Updike, LLM, JD; Mick Law P.C. LLO
Mick Law P.C., based in Omaha, Nebraska, is a specialty firm comprised of full-time and of-counsel attorneys who each possess a concentrated area of expertise and in-depth knowledge. While providing a broad range of legal services to valued clients, Mick Law focuses on two principal areas of practice; broker-dealer and registered investment advisor representation and real estate finance.
Sector Summary For 2018, eight sponsor companies raised about $401 million for use within various non-traded energy programs. That represents a year over year increase of 21.5% from $330 million raised by the sector in 2017, a commendable result after considering the pricing volatility observed in Q4 2018 in the oil market. For 2018, eight sponsor companies raised about $401 million for use within various non-traded energy programs.
Leading the sector in terms of capital raised was Mewbourne Development Corporation (“Mewbourne”), $116.7 million, which was followed by U.S. Energy Development Corp. (“U.S. Energy”), $100 million, and MDS Energy (“MDS”), $65 million. Of eight sponsor companies, five reported varying levels of program capital growth from 2017 to 2018 (63% of the sector), with each of these five companies also reporting capital growth for a second consecutive year. This trend compares favorably to what we observed from 2015-2016, in which only two of nine sponsors reported growth in program capital raising year over year. The biggest mover in terms of raised capital in 2018 was MDS, which doubled its capital raise from $32 million in 2017 to $65 million in 2018. Also deserving of honorable mention was (i) Mewbourne, which increased its annual raise from $78 million in 2017 to $116.7 million in 2018 (i.e., 50% growth year over year), and (ii) Montego Minerals, which increased its capital raise by about $28 million year over year (going from no capital raised in 2017 to funding two programs this year after undergoing a planning and structuring year).
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A chart of the year over year fundraising totals of the eight retail energy sponsors we cover is provided to the right (with U.S. Energy’s numbers reflecting estimated results based upon numbers that were reported in late December 2018). Four 1031 programs were collectively funded by Resource Royalty and Montego Minerals in 2018. Resource Royalty acquired leased minerals primarily in the north-central Oklahoma STACK/ SCOOP Plays, whereas Montego Minerals acquired leased minerals primarily in the Permian
Company
2018 2017 2016 Raise Raise Raise
Strategy
Mewbourne Drilling-Horizontal Wells in Permian, Tx Panhandle and Anadarko Basin
$116.7mm
$78mm
$63mm
MDS
Drilling-Horizontal Wells in Marcellus Shale
$65.5mm $32mm $23mm
APX
Drilling-Mississippian Oil Targets in Illinois Basin
$23.4mm $28mm $18mm
John Henry Oil
Drilling-Trenton Black River Oil Targets in Tennessee
U.S. Energy
Drilling-Horizontal Wells in Eagleford Shale
in 2018. The pace of capital growth in this sector has been steady yet arguably conservative at
Waveland
times over the past four years ($247 million 2015, $300 million 2016, $330 million 2017, and $401
Opportunity Fund Targeting Leases and Upstream Private Equity (Permian Basin, San Juan Play in NM, STACK Play in Oklahoma)
Resource Royalty
1031 Programs Acquiring Minerals and Royalties in STACK Play of Oklahoma
Basin and in East Texas. While 1031 energy capital accounted for about 15% of the total retail energy capital, this asset type did experience fairly significant growth in 2018. Waveland Energy’s fund raising numbers are primarily comprised of the capital raised within the closing months of Waveland Resource Partners IV. This fund raised about $80 million of retail capital from mid-year 2016 through Q1 2018. Waveland Energy’s opportunity fund program, Waveland Resource Partners V, opened its program late in 2018, will run its offering through December 31, 2019, and is targeting $100 million in raised capital. Waveland Energy reports that 11 firms have signed selling agreements, with an additional 14 firms conducing due diligence at this time.
Perspective Regarding the Future While the size of the retail energy sponsor group remained stable year over year (e.g., eight sponsors in 2018, eight sponsors in 2017, and nine sponsors in 2016), the capital pool increased significantly
million 2018). We believe this trend is due to severe levels of market volatility, coupled with the fact that the sector is endeavoring to regain investor trust that was lost as a result of performance failures by several companies that no longer raise capital in the retail channel. Despite the challenges, program capital increases have, in fact, been realized within the sector for three consecutive years. We believe that the overall strength of the sponsor group
Despite the challenges, program capital increases have, in fact, been realized within the sector for three consecutive years.
today compared to what was the case ten years ago bodes well for this segment going into 2019 and later years, with the capitalizations and performance level of the present group being better than that of the sector ten years ago (with about 30 companies raising close to a billion
$4.9mm $4.5mm $3.0mm
$100mm $109mm $147mm (estimate)
$33mm $40mm $10mm (second program runs through 2019)
$30mm $28.5mm $9.1mm
Montego 1031 Programs Acquiring $27.9mm $0 NA Minerals Minerals and Royalties in (Planning the Permian Basin, East Year) Texas, and in Central Oklahoma
in retail capital in 2008, but with a substantial majority of these companies not achieving their performance goals).
Performance News
2018 Totals by Strategy
In addition to sharing its capital raise numbers, Mewbourne, APX, and Resource Royalty provided
Drilling.............................. $290.1 million (70%)
us with performance reports in relation to a number of operational investment programs.
Opportunity Funds.......... $53 million (13%)
As MDS also recently shared distribution information, we have added that to our report. Note that due to well depletion, distributions in later years will be lower compared to
Minerals/Royalties........... $57.9 million (15%, up from $28.5 million in 2017)
earlier years when a well tends to produce most of its oil/gas. A more complete explanation of each sponsor’s performance will be provided in our upcoming sponsor due diligence opinions this year.
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Market Outlook
A summary of the information is provided below:
By analogy, the 1031 real estate asset class went through restructuring and came back from
Mewbourne
about $250 mm in 2009-2010 to $1.3 billion in 2016, to $1.75 billion in 2017, and to about $2
Cumulative Program Cash on Cash
Trailing 12 Months
Observation: The performance of these
billion in 2018.
programs illustrates: (i) the advantages of
In contrast, we continue to anticipate a “slow climb” back to pre-2015 raise numbers (i.e.,
MEP 2014.......................64%..............12.51%
pursuing a multi-year drilling schedule as
$800 million), as oil prices remain uncertain but with a few indicators suggesting that oil/gas may
MEP 2015.......................70%..............19.26%
opposed to playing the IDC game; and
be poised to rebound to some extent (i.e., due to OPEC production cuts).
MEP 2016.......................69%..............43.32%
(ii) the value of putting cap. ex. to work
MEP 2017.......................24%...................24%
when AFE prices are lower versus higher.
The following market information was derived from a number of informational sources:
Oil – In 2018, West Texas Intermediate (“WTI”) crude oil spot prices averaged $65 per barrel
APX Energy
(“bbl”), up $14/bbl from $51/bbl in 2017, and up $18/bbl from $47/bbl in 2016.
The New Harmony—C drilling program, which raised approximately $15.561 million in 2016,
WTI’s average of $65/bbl in 2018 outperformed the EIA’s forecast of $58/bbl. Reasons for the
returned 47% cash on cash through December 2018 (17 distribution months, 34-well program).
outperformance would appear to include: (i) OPEC’s general cooperation with output quotas; (ii)
The initial year federal income tax deduction for the New Harmony—C drilling program was
world GDP/demand; and (iii) a weaker U.S. Dollar through much of the first six months of 2018
reported to be 77% of the invested capital.
(i.e., 0.80-0.84 to $1 conversion rate observed in the first six months of 2018).
Observation: APX/Campbell Energy’s strategy to focus in the north part of the New Harmony fault system appears to be working based upon early distributions from the 2016 program.
to 1 conversion rate observed in the later months of 2018); (ii) a reduction in oil demand due to a feared economic slowdown in world GDP; and (iii) a sentiment that OPEC’s output quotas will
The performance of six direct title programs were reported as follows: Well Count
the past two months. The West Texas Intermediate spot price as of January 2, 2018 was $47.34 per bbl. Reasons for recent downward price pressure include (i) a stronger U.S. Dollar (i.e., 0.88
Resource Royalty
Program
Despite upward pricing movements in 2018, oil prices have come down significantly over
Start Date 12-Month Trailing Return
Observation:
not keep pace with U.S. shale oil production. In its December 2018 outlook, the EIA forecasted Brent spot prices to average $61/bbl in
Preston Fisher..................33......... Q4 2016.................................11.39%
Well counts rising
Blaine Fisher....................29......... Q2 2017...................................5.25%
in programs with
King Woods.....................28......... Q3 2017.................................11.88%
an Anadarko
The EIA’s market sentiments last month, which forecasted an average WTI price of $54/bbl for
Canadian River................42......... Q4 2017.................................12.67%
Basin focus.
2019, are moderately more optimistic than the NYMEX futures prices observed on January 2,
King River........................50......... Q1 2018............................... 12.32%*
*annualized
2019, with WTI crude oil prices expected to be about $7/bbl lower than Brent prices in 2019.
2019 for the next 12 months: Strip Jan. 2, 2019
MDS Energy
NYMEX Contract Month
MDS distribution summary—August 2018 distribution
Feb. 2019 .................................................. $47.24/bbl
Partnership Month %
Total # of May Total % Annualized Distributions Pricing Cash on Cash % Cash on
SPRING 2019
Dec. 2019 .................................................. $50.28/bbl While OPEC is positioned to continue output-related cooperation, the U.S. shale industry
MDS 2017 .................................. 0.59....................... 2.......$2.40................... 1.22............... 7.32
continues to drill wells and to increase oil production at an alarming rate. For 2017, the EIA
MDS 2016, 7.5% discount............ 1.85....................... 6.......$2.26..................11.62............. 23.24
forecasted oil production to average 9.2 million bbls per day, which was materially consistent
MDS 2016 .................................. 1.71....................... 6.......$2.26..................10.75............. 20.55
with the 9.4 million bbls actually produced that year. In 2018, however, actual U.S. oil production
MDS 2015, 7.5% discount............ 1.41..................... 19.......$2.23..................34.85............. 16.98
exceeded the EIA’s forecast by a significant percentage (i.e., 11 million bbls per day actual vs.
MDS 2015 .................................. 1.31..................... 19.......$2.23..................32.24............. 15.70
EIA’s 10 million bbls per day forecasted).
Observation: Better gas pricing reflected within recent distributions.
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July 2019 .................................................. $49.00/bbl
MDS 2017, 7.5% discount............ 0.64....................... 2.......$2.49................... 1.32............... 7.91
MDS 2014 .................................. 0.89..................... 31.......$2.24..................24.24............. 10.71
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Contract Price
While OPEC is positioned to continue output-related cooperation, the U.S. shale industry continues to drill wells and to increase oil production at an alarming rate.
Presently, U.S. oil production is 11.7 million bbls day, which the EIA expects will continue to increase in 2019 (i.e., 12.1 million bbls/day average forecasted by the EIA).
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Despite an oil price drop in Q4 2018, in which we saw prices decrease from $70/bbl on October
TABLE I — Break Even Field
2, 2018 to slightly under $50/bbl at year-end, the U.S. rig count increased by about 2.94% over Break-Even/BBL
such period, with Baker Hughes reporting 1,083 land rigs in operation as of December 28, 2018
Midland-Sprayberry/Wolfcamp $32 Eagleford Oil
compared to 1,052 land rigs in operation as of October 5, 2018. U.S. oil production appears to be moving in the same direction as the rig count, with the U.S.
$36 - 42
production increasing from 11.1 million bbls/day at the end of September 2018 to 11.7 million
Bakken/Core $36 Delaware-Wolfcamp/Bone Spring
$37 - 43
N. Central Oklahoma STACK
$35 - 40
Eagleford Condensate
$45 - 47
Cental Oklahoma SCOOP
$40 - 50
bbls reported in late December 2018 (i.e., 4.4% production increase reported Q4 2018). Despite lower oil prices, there are a select number of fields in the U.S. where oil can be produced at lower $30-50/bbl prices. Not surprisingly, the break-evens of the fields tend to correlate positively with the areas of the U.S. where rig activity continues to be very high. A summary of this correlation can be observed within the tables at the left.
Bakken/Non-Core $50 Raymond James Equity Research
Natural Gas – As reported by the EIA, natural gas inventory in the U.S. stood at 2,725 bcf on December 21, 2018, 18% below the natural gas inventory reported a year ago, and 19% below
TABLE 2 — Rig Activity Field
Rigs Rigs Dec. 28, 2018 Year Ago
the five-year average. Change
Despite lower inventory, natural gas futures prices remain consistent with market prices
486
398
+22%
observed since 2015:
Eagleford (S. Texas)
80
70
+14%
Strip Jan. 2, 2019
Cana Woodford (Central Oklahoma)
59
73
-19%
NYMEX Contract Month
Bakken Shale
56
47
+19%
Feb. 2019 ................................................. $2.95/mcf
2013..... $3.73 2016......$2.52
July 2019 ................................................. $2.70/mcf
2014..... $4.37 2017......$2.99
Dec. 2019 ................................................. $2.90/mcf
2015..... $2.62 2018......$3.16
Permian (Midland/Del. Basins)
Baker Hughes Rig Count
Natural gas price average Contract Price
—past six years
We note that despite the natural gas prices observed within the mainstream market, it is important to also consider circumstances that cause local natural gas prices to deviate from the main market. Such facts and circumstances include gas supplies in an area and the area’s ability to carry the supplies to market (i.e., takeaway capacity). Areas of the U.S. where most of the domestic natural gas is produced include Appalachia (Marcellus/Utica), 31,037 mcf/day, Permian Basin, 9,721 mcf/day, Haynesville Shale Play (E. Texas and W. Louisiana), 9,721 mcf/day, Anadarko Basin (STACK/SCOOP Plays), 7,535 mcf/ day, and Eagleford Shale Play, 7,206 mcf/day. Coincidentally, areas of high production can
We note that despite the natural gas prices observed within the mainstream market, it is important to also consider circumstances that cause local natural gas prices to deviate from the main market.
experience bottlenecks in gas takeaway capacity from time to time. This truism has played out, historically, in Pennsylvania, the core of the Marcellus Shale Play, and most recently in the Permian Basin, which accounts for over 40% of the rigs operating in the U.S. While substantial natural gas differentials were experienced in the Marcellus Play a couple of years ago, the addition of transmission infrastructure has reduced gas price differentials from $1 per mcf and higher in 2015-2017 to about $0.40 per mcf today. Based upon DTI gas pricing, the pricing differential expected for gas produced in eastern Pennsylvania that is purchased by Dominion Energy Transmission, Inc. is expected to average $0.47 per mcf in 2019 (Source: CME
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futures), which is again lower than the differentials observed 2-3 years ago.
sponsor’s portfolio of programs performed quite well in the 2000-2005 vintage years when oil
Unfortunately, higher differentials are being experienced by operators that deliver their natural
was $20-$50 bbl and when commodities were generally on a more stable ground. Thus, there
gas to the Waha Hub in Pecos County, Texas, which currently services the Delaware and Midland
may be market upside left to capture within plays that have diverse commodities streams and
Basins. At this time, the pricing differential for gas delivered to the Waha Hub is expected to
good avenues to markets.
average about $1.50 per mcf in 2019, with higher differentials close to $2 per mcf expected in
While the media continue to favor West Texas in terms of economics, remember that there are
Q1 2019. While infrastructure projects are planned for the area, media sources are projecting a
core and non-core areas in all popular plays. This is another area where the value of independent
12-month period before the positive effects of the projects are realized. While the presence of wet
project underwriting comes into play.
gas helps to bump the effective natural gas prices realized by some operators in the Permian, we would suggest the financial modeling of lower gas prices for at least 24 months in this area as a best practice. Market Pricing Summaries
Summary
Oil Spot Price (1/2/18)..............................................$47.34 (2018 avg. was $65/bbl)
As we predicted a year ago, retail energy capital raise numbers displayed growth in 2018, and we continue to
NYMEX Gas (Feb. 2018 deliveries)...........................$2.95 mcf (2018 avg. was $3.16/mcf)
believe that 2016-2018 could be good vintage years for the group of retail sponsors that raised capital over
Nymex Futures 2019/oil...........................................$47-50 per bbl (CME 1/2/19)
the past couple of years in terms of performance. A smaller but better group is reestablishing the market.
NYMEX Futures 2019/gas........................................$2.70-3.01 mcf (CME 1/2/19)
While capital raise numbers have yet to reach the levels of capital raised five years ago, the “foundation for
DTI Avg. 2019 Differential.........................................$0.47 per mcf (CME 1/2/19)
growth” continues to be on better ground than what we had years ago in a promoter-infested environment.
WAHA Avg. 2019 Differential....................................$1.50 per mcf (CME 1/2/19) ILL/Countrymark Differential (12/18).........................$7 per bbl (preferred pricing terms available for certain operators based upon volumes)
What Makes Sense in 2019
On a final note, we believe it is noteworthy to mention the findings of a recent article we came across that highlights the continuing and irresponsible use of leverage by many public and private upstream companies in the U.S. The source places the debt at $280 billion U.S., with 90% of the debt being attributed to shale oil producers. Using break even prices quoted by certain of the public companies, the source estimates that the upstream industry will spend $20 billion this year in covering interest payments, which accounts for 1.5 million
While pricing fundamentals remain a wildcard for 2019, there continue to be areas in the U.S.
of the U.S. daily oil production. More alarming, the source estimates the production burden to pay off the
where oil/gas can be developed economically. Notwithstanding, cautious underwriting practices
leverage at 9 billion bbls, which equates roughly to what the U.S. upstream industry produced over the past 10
are key, as it is important to understand the break-evens of projects given their locations and corresponding challenges. Pro formas must factor relevant commodities pricing discounts based upon local supply/demand and available infrastructure. Additionally, special cost related considerations, such as water disposal, sponsor/manager compensation, and load, must be built into the economic underwriting models. With your assistance we have largely eliminated
years. On a better note, we mention that that limited leverage is being used today by the operators that raise money for drilling from retail investors, which generally bodes well from a due diligence perspective. Word to the wise-don’t be too quick to approve the unproven sponsor and stay disciplined on due diligence. Underwrite, underwrite, underwrite.
abusive turnkey structures and excessive management fees, but in 2018 our petroleum engineers identified several deals with aggressive and unobtainable assumptions.
As we encouraged last year, more of our client base is looking to minerals and royalties as potential opportunistic assets.
As stated last year, and in respect to programs that are taking a non-operated working interest in projects, look for opportunities where the project developers have proof of concept and strategic alliances with major companies/investors. As to drilling focused programs, we need to continue to convince most of the drilling sponsor group that capital deployment over multiple years makes sense. Those that drill over multiple years do better. As we encouraged last year, more of our client base is looking to minerals and royalties as potential opportunistic assets. This was demonstrated by a noticeable uptick in the capital raised to purchase mineral assets in 2019. Looking back at the prior performance history of a certain sponsor that dominated the royalty segment of the asset class for years, it is noteworthy that this
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By: Matthew Iak, Executive Vice President, U.S. Energy Development Corporation
Around the Industry Update Q&A
Taylor Garrett, Managing Director, Mountain Dell Consulting
Mike Huisman, Senior Director, Digital Operations, DST Systems
as oil and gas companies both public
for their services before the commodity price even begins to
gas industry today, with fewer exploration projects to find and
and private have increased their focus
move, all in anticipation of a higher price. Compare this to
replace current reserves, we share the same viewpoint as
on capital discipline and productivity
where we are today as the volatility in pricing helps to keep
several major financial institutions (Goldman Sachs) that this
improvements.
in
oil and gas markets competitive, and that is a huge benefit
is likely to result in a dramatic oil supply shortage which could
approach bodes favorably for the
to our direct investors. Additionally, investors in direct oil
also create a surge in oil pricing in the not too distant future.
health and stability of the sector and will
and gas investments can sometimes forget that they won’t
This
change
Q. Oil & gas had what many would call a
help to ensure future profitability even
receive income based on oil prices today, but instead they
during periods of low breakeven prices.
receive income following the drilling and completion process
Just this year, improved financials coupled
and once the wells go into production, which can be six to
with technological advancements in drilling
twelve months after investment. It’s almost a double-win for
techniques have led to a surge in new drilling
direct oil and gas investors: They receive a big tax deduction
A. Several factors are behind the recent resurgence in
domestically, especially in the sought-after regions of
now and can let the market steady over the next 12 months.
direct energy investments this year. In addition to all of the
the Permian Basin and Eagle Ford Shale in Texas. In 2018,
The lower pricing also allows us to explore additional hedging
favorable market factors discussed above, from a capital raise
the United States has become the world’s largest producer
opportunities and potentially create other efficiencies by
standpoint, tax reform from the Tax Cuts and Jobs Act (TCJA)
of oil for the first time since 1973, surpassing oil-producing
incorporating additional technologies.
has spurred additional interest and new investments. First,
powerhouses Russia and Saudi Arabia. In fact, the state of
resurgence recently—what helped shape that industry trend?
not only were the tax-favored treatment of direct oil and gas
Q. Where do you see oil & gas headed in 2019? A. At some point in the near future, whether that be in 2019
investment preserved in tax reform (notably this includes the
While more recently we’ve seen a drop in oil pricing, this
or soon thereafter, the lack of CAPEX (or capital expenditure)
investments as many of the tax deductions clients have relied
too bodes favorably for the immediate future of direct oil and
for new oil and gas projects is going to create a global oil
on for years were reduced and/or eliminated with the TCJA.
gas investments for several reasons. While it can be difficult
supply shortage. Between 2014 and 2016, we witnessed a
This has resulted in increased demand for oil and gas Drilling
sometimes to see ‘the forest through the trees’ when it
global decrease in oil and gas capital expenditure by 44%.
Funds which provide a tax deduction in the year of investment
Q. How has 2018 fared for oil & gas? A. 2018 has been a strong year for oil and gas direct
comes to making an investment decision, in this style of long
It’s estimated that nearly $1 trillion in exploration budgets
right up until midnight on December 31st. U.S. Energy has
term investment volatility in pricing during the capital raise
which would bring new supplies of oil and gas to market were
been extremely proactive this year in the development of
period can be extremely beneficial to investors. Most notably,
lost. Add to that, exploration projects to find new sources
additional advisor tools, educational programs and advanced
investments as improvements in the underlying health of the
price volatility helps to keep a lid on operational costs. In
of oil and gas reserves have dropped from 19% to 12% of
tax planning strategies focused around the tax law changes,
oil and gas market continues to benefit the long term outlook
situations where the underlying belief is that oil prices are
total wells in just the last 6 years. While in some ways this
which has allowed advisors to attract new high net worth
moving higher, we’ve seen outside firms increase the cost
demonstrates the prudent financial discipline of the oil and
clients or build upon their current book of business.
Texas alone is on track to produce more oil than either Iran or Iraq by 2019, which would rank Texas as the #3 producer in the world if it were a country.
Oil & Gas From Matthew Iak, Executive Vice President, U.S. Energy Development Corporation
of the sector. Over the last five years, we’ve seen a transition
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Intangible Drilling Cost Deduction and Depreciation Deduction) but advisors have seen an increased need for oil and gas
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Q. Which product structures have been the
most successful recently, and which do you expect to continue, or rise, in popularity?
A. In 2017, approximately 70% of the capital raise for
in our space and is creating leaps in the areas of safety, production, operational excellence, predictive maintenance, transportation and more. For example, we are witnessing drones gather inspection data in a week versus the 2 months it can take for a team of technicians to do it. Today a COO
between 20-40% growth over the past six years. We anticipate the lower end of that for 2019.
Q. Are there any industry shifts you expect
up, companies are relying more and more on data for answers and direction. Sponsors are meshing all types of data to learn more about advisor’s selling patterns and are looking to gain insight on where and when to introduce their products.
direct oil and gas investments came in the form of traditional
can use their phone to view an individual well’s production
Drilling funds with the remaining 30% of capital raise coming
chain and detailed cost data just as the on-site team sees it.
from minerals and opportunity-style funds. (Source: Mick
Screens are used to monitor a two mile well as it is drilled,
Law P.C., LLO)
While we expect demand for Drilling Funds
and the slightest deviation from its “sweet spot” is captured
to remain strong, and maybe even be a little inflated for the
immediately and adjustments occur “on the fly”. Even the
next few years as high net worth investors look to replace
difficult question of “where to drill and how many wells?” is
tax deductions they are losing from the TCJA, long term we
made easier by leveraging historical and real-time data from
see Opportunity-style funds becoming more mainstream.
the well site. Deep analysis of wells in similar formations are
While we believe the tax planning advantages that come
used to quickly discover best-performing wells with similar
with a Drilling Fund that offers a significant tax deduction in
characteristics to minimize drilling issues and optimize well
the year of investment will continue to be the cornerstone of
completion. The automation benefits ultimately help make
financial planning for top advisors and high net worth clients,
for a better investor experience as well. A recent oil and gas
Opportunity funds can provide a larger segment of investors
report by a leading management consulting firm (McKinsey)
with ownership in a wide range of energy assets which
suggests that the effective use of digital technologies could
provide income and tax diversification. U.S. Energy has raised
reduce capital expenditures by up to 20%. I don’t know of
over $100 million in these Opportunity-style funds over the
any firm who would ignore those numbers, and our investors
and single tenant is in second place to that. I think we will
last several years and as more Broker Dealers, Advisors and
deserve to see those efficiencies. The 2014 experience when
start seeing the products I mentioned above.
Investors become accustomed to this offering structure and
oil collapses roughly 75% was not a great one for any of
I think we are going to start seeing some larger, well
the income potential, we expect to see additional demand in
us in that moment. However, that period forced firms to
capitalized sponsors enter the space. We like the quality of
the coming years.
modernize, to invest in technologies, and this overhaul in
sponsors that are entering the space. We’ve come a long
approach is a primary reason why we feel that our space is
way in the 17 years we have been tracking the market. We
poised for unprecedented success.
worked last year or today will work in the future. Firms need
like the direction it is going and hope to see strong operators
to continue refining their logic and insight as more, and
enter the space.
different, data is made available.
Q. What role does technology play and what
impact will it have in the oil and gas world today?
A. The perception that oil and gas companies are not keeping up with embracing the automation capability that technology brings couldn’t be further from the truth. For years the industry was likely slow to change or invest in new technologies because it didn’t have to likely due to its wealth. Sustained high prices and a consistent inflow of capital allowed companies to hide their inefficiencies. That narrative has changed and technology is viewed very differently by today’s leaders as more companies are forced to operate with an “innovate or die” mentality, and, as with our firm, investors are demanding it. Technology is having a profound impact
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A. We still anticipate moderate growth. We have been
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to see?
A. Interest rates have moved up with cap rates staying somewhat still. As such, cash flows have moved down a bit. We are starting to see more products outside of the traditional apartment sector such as student housing and 55+ housing. We are also starting to see some other product types come back to the space such as multi-tenant office, medical office, multi-tenant retail and even some hotel deals.
Q. Which property types are the most
popular? Which are expected to gain in popularity, and why?
A. Apartment types are still 60+ percent of the market
Syndicated Like-Kind Exchanges By Taylor Garrett, Managing Director, Mountain Dell Consulting
Q. How has 2018 fared for 1031 exchanges? A. It looks like we will hit between $2.3-2.35 billion in equity raised.
Q. What do you think the 2019 outlook is
for 1031 exchanges?
REITs/BDCs By Mike Huisman, Senior Director, Digital Operations, DST Systems
Q.
Q. How do you think big data will affect
alternative investments in 2019?
A. I think we will continue to see more advancement in how quickly data is made available to identify unique sales signals. The markets have become very competitive and any advantage a firm has, could be the difference between success and failure.
Q. Are there any major trends shaping up
financial services software?
A. A major trend impacting financial services software is more information and data is being pushed into CRM systems so the power of all that data can work for the sales team.
Q.
Are there any big pitfalls for which ADISA members should be on the lookout?
A. Don’t just stand still and believe benchmarks that
Q. What new data and automation trends have helped attract new investors and advisors?
A. I think you will start to see people looking more at the relationships between different data variables to
How has big data affected alternative investments in 2018?
discover new investors and advisors. Understanding the
A. The alternative investments industry has been rapidly
education, hobbies and wealth segmentation will lead to
changing due to the introduction of new products and rising investor demand. In response and attempt to keep
unique relationships between individuals, demographics, identifying opportunities that have always been there but the combinations have not yet been explored or leveraged.
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ADISA
News
Events
2019 ADISA Board of Directors and Officers Announced ADISA Advocacy ADISA 2018 Annual Conference & Trade Show Wrap-Up
Advocacy Roundup ADISA Submits Comments Regarding FINRA 2018 Exam Findings (January 2019)
Securities in response to the state’s uniform fiduciary standard
ADISA responded and provided feedback on the 2018
was co-signed by ADISA, SIFMA, the IPA, Financial Services
Examination Findings issued by FINRA last month. ADISA
Institute, Insured Retirement Institute, NAIFA, New Jersey
routinely submits comment letters and related submissions in
Bankers and ACLI; and highlighted these problematic
response to industry-related initiatives undertaken by regulators
aspects of the state’s proposal:
at the federal and state levels, and engages in frequent
• The active federal activity in pursuit of an enhanced
dialogue with legislators and regulators in order to supply them
standard of care for broker-dealers.
with useful information about alternative investments and their use in client portfolios.
2019 ADISA Board of Directors and Officers Announced Back in the fall of 2018, ADISA members elected new
Matt Malone, FS Investments
directors for its 2019 board. ADISA holds democratic
Greg Mausz, Preferred Apartment Communities
elections hosted by a neutral online vendor, and the elections are open to all member categories (with a maximum of three votes per firm). The eight newly election (or re-elected) board directors are: Brandon Balkman, Orchard Securities Brian Buehler, Triton Pacific Securities Sherri Cooke, AI Insight John Grady, DLA Piper Jean Merriman, The Strategic Financial Alliance (SFA) Joe Michaletz, Discipline Advisors
26
sense of what the organization is seeing in the course of its examination program, the report could be further enhanced by clearly prioritizing or characterizing its observations, as well as
Brad Updike, Mick | Law
identifying the standards FINRA used in determining whether
Tom Voekler, Kaplan Voekler Cunningham & Frank
to include an observation in the report.
Darryl Steinhause of DLA Piper also serves as a
• Within the topics covered, ADISA believes that it would
non-voting, volunteer legal counsel.
prove useful for FINRA to include information about potential
Furthermore, at its first meeting of the year, the new ADISA Board selected its 2019 officers. Greg Mausz of Preferred Capital Securities began his term as the 2019 ADISA president (having been elected president-elect in 2018), and
Larry Sullivan, Passco Companies
president-elect and will serve as president in 2020. The other
Andrew Barnum, Cetera Financial Group
• While the report will provide FINRA members with a
Kurt Tesh, Kalos Financial
Larry Sullivan of Passco Companies was elected as the 2019
were elected last fall to two-year terms, and include:
which include:
Ann Moore, International Assets Advisory
Vali Nasr, Claraphi Advisory Network
They join the returning 2018 board members, who
ADISA had a number of enhancement suggestions,
solutions or steps that members used or may use to address shortcomings and other problems observed.
duty would face. • The problematic nature of state-specific fiduciary standards.
ADISA Co-Signs Letter in Support of the Invest in American Act (November 2018) ADISA joined major housing and real estate organizations in co-signing a letter to Congress in support of the bipartisan Invest in America Act (H.R. 6726) introduced by Representatives Kenny Marchant (R-TX) and Joseph Crowley (D-NY), which would repeal the Foreign Investment in Real Property Tax Act (FIRPTA). FIRPTA is a major obstacle to capital formation and investment in U.S. commercial real estate and infrastructure.
• ADISA also believes that providing greater clarity around
It discriminates against real estate by subjecting foreign
FINRA’s standards used for including an observation in the
investors to U.S. capital gains tax on their sale of U.S. real
report would lead to fewer instances of the report’s conclusions
estate and infrastructure.
being “sensationalized” in the press and elsewhere.
Furthermore, a recent study, by University of California,
• ADISA also suggested that the report explore the linkage, if any,
Berkeley professor and economist Ken Rosen estimates
Securities as vice president; Ann Moore of International
between FINRA’s beginning-of-year examination priorities and
FIRPTA repeal would generate 147,000-284,000 new, well-
Assets Advisory as secretary; and Mark Kosanke of Concorde
observations made in the course of a calendar of examinations.
paying jobs in the United States by spurring greater inbound investment in U.S. real estate and infrastructure.
Investment Services as treasurer. Keith Lampi of Inland Private Capital Corporation, ADISA’s 2018 president, will serve the Board
Mark Kosanke, Concorde Investment Services
as its immediate past president. Additionally, Susan Kelly of
ADISA Continues Efforts on New Jersey Fiduciary Rule (December 2018)
Prior, collective efforts on FIRPTA reform resulted in bipartisan bills that were cosponsored by 90% of the members of the tax-writing committees.
Keith Lampi, 2018 ADISA President,
Commonwealth Financial Network was also elected by the
ADISA joined major financial services trade associations as
Inland Private Capital Corporation
Board to serve as a director for a two-year term.
signatory to a letter to the chief of the New Jersey Bureau of
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• The significant pre-emption hurdles any state-level fiduciary
ADISA officers selected were: Brian Buehler of Triton Pacific
Catherine Bowman, The Bowman Law Firm
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pre-proposal. The most recent letter, dated December 14,
The Invest in America Act would build on recent progress.
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ADISA 2018 Annual Conference Sets Record Attendance with Opportunity Zones, 1031 Exchanges and Earvin “Magic” Johnson at Top of Program ADISA’s 2018 Annual Conference & Trade Show, held October
• The Distinguished Service Award was presented to two
8-10 in Las Vegas, drew more than 1,000 attendees from
individuals, Dave Laga, chief financial officer and director
the alternative, direct investment space for the association’s
of due diligence of DFPG Investments, and Brian Buehler,
largest conference to-date.
partner with Triton Pacific Investment Corporation.
“ADISA’s 2018 Annual Conference & Trade Show was full of energy and excitement as leaders in the alternative investment space met to discuss the latest trends and learn about products and regulatory affairs,” said John Harrison, executive director of ADISA. “NBA legend and Naismith Memorial Basketball Hall of Fame inductee Earvin “Magic” Johnson delivered a fantastic keynote address, where he shared his entrepreneurial story and entertaining anecdotes about his career. We thank everyone who participated in the conference and are looking forward to a successful 2019.” The conference included approximately 40 educational sessions covering qualified opportunity funds, Section 1031 exchange investments, private equity, energy, conservation easements, legislative and regulatory updates, real estate investment trusts, business development companies and more. The agenda included four sessions with FINRA and state regulators in attendance. Conference attendance was evenly split between two primary industry groups—product sponsors and affiliates, and broker-dealers, RIAs and financial advisors. Additionally, ADISA’s post-conference survey results indicated a 4.5 out of 5 in overall satisfaction. The number of exhibitors grew 14 percent from the association’s 2017 Annual Conference & Trade Show with approximately 80 exhibitors overall. The conference kicked off on Monday night as ADISA announced the 2018 winners of its A Champion of Excellence (ACE), Distinguished Services and President’s awards.
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Annual Conference Keynote Speaker Earvin “Magic” Johnson, named a street “ADISA Way” in a new subdivision in North Texas in honor of ADISA. MCI presented ADISA with the plaque before Magic took
partner with DLA Piper.
the stage on the last day of ADISA’s
At the industry update general session, Taylor Garrett with
Annual Conference & Trade Show in Las Vegas.
Mountain Dell Consulting reported that the Section 1031 exchange investment industry has raised nearly $1.9 billion in equity through the beginning of October 2018 and is on track to raise approximately $2.4 billion by year-end. The market is raising approximately $6.7 million per day and the expected yearly total will be a 23 percent increase from 2017. There are 35 active sponsors year-to-date in 2018, up five from 30 active sponsors in 2017. Qualified opportunity funds, a new entrant to the alternative, direct investment space as a result of the Tax Cuts and Jobs Act of 2017, were covered in two sessions during the conference. Qualified opportunity funds capture private equity that flows into new Opportunity Zones and are designed to incentivize investment capital into designated census tracts nationwide. Greg Genovese with Sound West Realty Capital said, “Qualified opportunity funds can help move billions of dollars in unrealized capital gains from almost
CLOCKWISE FROM UPPER LEFT:
any source, including stocks, mutual funds and real estate,
• The ACE Award was posthumously presented to John Williams, co-founder and former chief executive officer of Preferred Apartment Communities.
off the sidelines through generous tax incentives and into communities designated as ‘Opportunity Zones.’” Mainstreaming alternatives expert Bob Rice, author of The Alternative answer: The Nontraditional Investments that Drive the World’s Best-Performing Portfolios, provided the closing guest speaker address. Rice drew upon his more than 30 years of experience as a lawyer, banker and consultant for
Williams, co-founder and former chief executive officer of
institutional investors, asset managers and financial advisors
Preferred Apartment Communities.
to discuss investing in non-traditional asset classes.
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MCI Megatel, the sponsor of ADISA’s
• The President’s Award was presented to John Grady,
• The ACE Award was posthumously presented to John
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Megatel Names Street After ADISA
• The Distinguished Service Award was presented to two individuals, Dave Laga, chief financial officer and director of due diligence of DFPG Investments, and Brian Buehler, partner with Triton Pacific Investment Corporation. • The President’s Award was presented to John Grady, partner with DLA Piper.
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29
10401 North Meridian Street Suite 202 Indianapolis, IN 46290
JULY
18 - 19
THE MAYFLOWER HOTEL WASHINGTON, D.C.
ADISA 2019 AI RESEARCH & DUE DILIGENCE FORUM OCTOBER
14 - 16
THE COSMOPOLITAN OF LAS VEGAS
ADISA 2019 ANNUAL CONFERENCE & TRADE SHOW
30
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